David R. Henderson  

Scary Words from Bernanke

The Zorn Effect... Banana Republic Economics...

This morning's Wall Street Journal quotes a 1999 paper by Ben Bernanke as follows:

Roosevelt's specific actions were, I think, less important than his willingness to be aggressive and to experiment -- in short, to do whatever was necessary to get the country moving again.

Remember that one of FDR's first actions was his successful push for the National Industrial Recovery Act, an Act that cartelized industries and slowed the recovery from the depression. You don't get output to be higher by making it lower. Similarly, he reduced output in the agricultural sector. But that and other FDR actions were, according to Mr. Bernanke, "less important than his willingness to be aggressive."

Here's another chilling quote:

One buzz word inside the Fed these days is "blue sky," a term meant to encourage Fed economists and other staffers to come up with ideas beyond their normal boundaries.

And clearly the Fed has been "blue skying" it. The article goes on to say:

One of the Fed's next big projects is a program to backstop the asset-backed securities market, which finances auto, credit-card and student loans. It will be launched in February and Fed officials see potential in it to be expanded to other asset classes, such as commercial real estate.

I can hardly wait for such bold experimentation. And, actually, the markets will wait. People might hold off on resolving various debt issues to see if the Fed will "backstop" them.

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The author at RollingDoughnut.com in a related article titled Quote(s) of the Day writes:
    Thanksgiving was my last entry? Let me rectify that with two quotes from reading the Internets today. First, from Rogier van Bakel on free speech.Denying others the rights and protections you demand for yourself is the zenith of arrogance.That's an... [Tracked on December 15, 2008 5:41 PM]
COMMENTS (10 to date)
Marcus writes:

If monetary policy is the best tool for dealing with deflation and treasuries aren't currently useful for implementing monetary policy, what is wrong with using other kinds of bonds to implement it?

gamut writes:

I love the terminology - 'backstop' - they've gone from simple plumbing to managing waterways.

gamut writes:

Or, better, after unclogging the pipes, they've now found that they need to turn on the tap. I expect that analogy in liberal use come January.

Maniel writes:

“Roosevelt's specific actions were, I think, less important than his willingness to be aggressive and to experiment -- in short, to do whatever was necessary to get the country moving again.” Ben Bernanke, 1999


These words are only scary in that they clarify what we know to be true, namely that there is more than one reality. There is perception; of course, politicians who are dependent on voters for their jobs and Federal-Reserve chairmen who are dependent on politicians for theirs, depend heavily on perception, on “truth through advertising” so to speak. Then there are measurable results, based on data and statistics; these are less clear cut than we would like because the data and statistics that economists favor may be less meaningful to politicians. For example, compassion for employees of American companies in distress may be perceived more favorably than compassion for those who foot the bailout bills.

Several years ago, my 13-year-old son brought this home to me. Following a session of his politically-correct algebra class, where students were taught to solve problems as a group, he remarked to me that “solving for ‘x’ is not important; it’s how you feel about solving for ‘x’.” I’m sure you can draw the analogy.

Gary Rogers writes:

The desire to "blue sky" solutions and think outside the box could actually be a good thing, as long as there is an understanding that continuous change and experimentation is the wrong solution. Too many people including George Bush, Barack Obama and almost all of congress have come to the mistaken conclusion that it is the government that solves problems. The truth is that government needs to create a framework that allows people to use their own resources to solve problems. This cannot happen if the framework keeps changing. The knowledge that Ben Bernanke is in the group that wants government to solve the problems is truly scary.

Lord writes:

And yet output grew.

Mr. Econotarian writes:

I do concur with Ben to a point...

Hoover (as documented in his speeches) was unable to conceive of leaving the Gold Standard, because of the number of contracts that had a gold convertibility clause in them. If the US devalued, debtors would be wiped out when they tried to pay back their ostensibly gold-denominated loans.

It took FDR a while to grasp this as well - eventually he came to the "blue sky" opinion that the Federal Government could indeed convert all contracts that call for gold into those that call for legal tender, and the "gold clause ban" legislation was passed, freeing FDR to devalue.

This was, of course, an unprecedented expansion of Federal power.

The way I read the Great Depression, the 1933 devaluation is the one thing that clearly helped. Everything else either clearly harmed or was questionable in helping out the situation.

(Look at my URL for info on the Gold Clause ban)

Troy Camplin writes:

Here's my blue sky suggestion: free markets. We ought to try it some time, see how it works.

Ed Hanson writes:

It should give you minor comfort to read the quote literally. FDR's New Deal actions were so ineffective in relieving the depression, thus setting the bar so low for comparison, that his willingness of aggressive experimentation was better and more important.

I easily found the Bernanke 99 paper through Google. Reading it gives clues to what to expect next from the Fed. It is not even a minor comfort.

Aaron from NJ writes:

Isn't the real issue that we have a massive world wide overcapacity and now a fall in the return on that investment.

We had a post cold war boom of 15+ years that allowed access to credit world wide. But that credit found industries, regions & investment allocation that doesn't have yield.

We overallocated resources to financial services as a % of GDP. Real Estate assets prices have grown to large relative to income or earnings to support them.

Savings,investment, productivity & income (if my econ is still correct) are the key drivers in long term growth, Purch Power, wealth.

If we look we had a low savings (you got better yield from debt) massive overinvestment in Real Estate, Financial Services, industrial overcapacity across 1000's of industries thru credit not strong balance sheets.

We all used credit instead of positive cash
(corp -working capital, free cash flow, low debt / consumers - savings ,low debt / Government - running deficits)

which we then leveraged as debt to compensate for low growth in income, productivity numbers were low except for 8 years in late 90's & early 2000's.

Total Investment (R & D, CapX, public, human capital) is low we have poor incentives, better yield in debt.

It all comes back to savings,investment, productivity & income.

All the fiscal policy or fed moves can't change the short term fundamentals that we built a credit/debt based investment economy vs. a working capital, free cash flow & savings

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